2 JUNE 2016

INITIATING COVERAGE I SECTOR: FINANCE

Manappuram Finance
STOCK INFO. BLOOMBERG
BSE Sensex : 26843 MGFL:IN CMP: INR53 TP: INR75 (+41%) Buy
REUTERS CODE
S&P CNX : 8219 MNFL.NS INVESTMENT ARGUMENT:

(INR CR)
Revamped the business model to de-risk gold loan business:
Y/E MARCH FY16 FY17E FY18E Post the FY12-14 period, when the gold loan industry faced regulatory
challenges coupled with steep decline in gold prices, Manappuram re-
NII (INR Cr.) 1,402 1,697 2,005
aligned its business model to de-risk it from volatility in gold prices. The
PPP (INR Cr.) 593 754 925
key changes it made to the core gold loan business were: (a) introduced
NP (INR Cr.) 353 451 558
shorter duration products of 3-6 months (12 month earlier) and
EPS (Rs) 4.2 5.4 6.6
recalibrated LTV to link it to product tenure i.e. lower LTV for higher
EPS Growth (%) 30% 28% 24%
tenure and vice versa and (b) adopted push approach instead of pull
ABV/Share (Rs) 32.0 34.5 38.2
earlier - started reaching out to customers through enhanced marketing
P/E (x) 12.6 9.9 8.0
and branch activation efforts and linked employee incentives to sourcing
P/BV (x) 1.6 1.5 1.3
business, timely recovery and default rates. The new business model
RoE (%) 12.8 15.3 17.3
built around lower LTVs and branch activation should lead to a revival in
RoA (%) 3.0 3.3 3.4
earnings growth.
Div yld (%) 3.4% 3.4% 3.4%
Synergistic diversification into new businesses: Manappuram has
forayed into synergistic non-gold businesses - microfinance, home loans,
CV loans and LAP. The objectives behind this diversification are (a) to
KEY FINANCIALS
reduce dependence on gold loans and gold price fluctuation, (b) to
Shares Outstanding (Cr) 84.12 capitalise on its proven operational capability to process large volume,
Market Cap. (INR Cr) 4,463 small ticket transactions with semi-urban and rural customers, (c) to
Market Cap. (US$ M) 666 leverage its strong 19.3 lac retail customer base and retail network of
Past 3 yrs NII Growth (%) 10 3,293 branches, (d) to utilize excess capital (CAR of 24.0%) and (e) to
Past 3 yrs NP Growth (%) 19 leverage upon Manappuram's existing brand image.
Dividend Payout (%) 43
Recovery in ROE on the back of higher operating and financial
STOCK DATA leverage: Earlier, AUM de-growth led by regulatory issues resulted in
52-W High/Low Range (INR) 56/20 a decline in return ratios due to fixed Opex costs. With focus on improving
Major Shareholders (as of Mar'16) productivity, Manappuram has not increased gold branches post FY13
Promoter 33.7 to boost operating leverage. We thus expect Opex to AUM ratio to decline
Non Promoter Corp Holding 40.1 as AUM growth improves thereby driving ROA from 3.0% in FY16 to
Public & Others 26.3 3.4% by FY18E. Along with increase in leverage from 4.5x to 5.6x,
Average Daily Turnover(6 months) RoE is set to improve from 12.8% in FY16 to 17.4% by FY18E.
Volume 3,570,909
Valuations not factoring in the changed business model and
Value (INR cr) 12.9
1/6/12 Month Rel. Performance (%) 31/101/72
expansion in new businesses: With a change in the gold loan business
1/6/12 Month Abs. Performance (%) 35/103/68
model and expansion in new businesses, we expect increased earnings
visibility with stable asset quality and improvement in return ratios. The
measures taken by Manappuram over the last 15 months to turn around
its business prospects should enable it to post 26% earnings CAGR over
Maximum Buy Price: INR60
FY16-18E. We value the standalone business at 1.8x FY18 ABV (lower
than 2.1x commanded by asset financiers like SHTF and MMFS having
inferior return ratios and asset quality); the microfinance business at
3.0x FY18E ABV (25% discount to our target multiple for SKSM) and
housing finance business at 2.0x FY18 ABV (at 40% discount to
industry). Consequently, our SOTP value for the company is at INR 75.
The stock provides for a dividend yield of 3%.

Jehan Bhadha (jehan.bhadha@motilaloswal.com); Tel:+912233124915

Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Manappuram Finance

SOTP Valuation

Entity/Segment FY18 Adj. BV Target P/B (x) Value Share

Standalone 30.5 1.8 55 73%
Microfinance (90% stake) 5.5 3.0 17 22%
Housing Finance 1.7 2.0 3 5%
Total 75 100%
CMP 53
Returns 41%

AUM growth of 24% over FY16-18E driven by non-gold businesses; non-gold book to form
25% of AUM by FY18E: Non-gold portfolio is expected to grow at 80% as against 14% for gold
portfolio over FY16-18E and thus lead to overall AUM growth of 24% over the same period. We model
non-gold portfolio to form 25% of overall AUM by FY18E as against 12% as on FY16.
Non-gold businesses (Asirwad Microfinance in particular) to create value in the long run: As on
FY16, Manappuram had a loan book of INR 999cr in microfinance, INR 129cr in home Loans, INR 130cr
in CV, INR 44cr in LAP and INR 51cr in other segments; aggregating to INR 1,352cr of non-gold loan
book. Manappuram acquired 85% stake in Asirvad Microfinance in FY15, (when it had an AUM of INR
322 cr in March 2015) headquartered in TN with operations in T.N, Kerala and Karnataka. Manappuram
intends to expand its business to more states. The 85% stake was purchased for a consideration of INR
136cr. Manappuram has further invested INR 100cr during FY16 in the subsidiary and currently holds a
90% stake. The microfinance sector has made a strong comeback in recent months and with a stable
regulatory environment in place, future prospects are bright. As a subsidiary of Manappuram, Asirvad has
already benefited substantially by access to lower cost funds (credit rating upgraded by 3 notches to A-)
which, in turn, is enabling expansion to other states. With a loan book of INR 999cr, Asirvad has already
generated ROA of 3.9% in FY16. In the coming quarters, microfinance will contribute significantly to
Manappuram's growth along with other new businesses.
Auction losses subsiding, as legacy portfolio runs off: Manappuram's legacy portfolio (higher LTV
product, with 1 year duration) ran off in June 2015 and the entire auction was done by August 2015.
Auction-related losses, which led to decline in yields and lower NII growth, are now behind. As a result,
gold yields increased 200bp QoQ in 3QFY16 and a further 40bp QoQ in 4QFY16 to 24.2%.
CONCERNS
Sharp decline in gold prices: Gold loans constitute more than 88% of total advances. Though the
average LTV on the loan portfolio is 70% and most products are now shorter duration, a sharp decline in
short time can lead to losses. An appreciation in INR would also lead to a decline in gold prices. Reduction
in import duty (10%) can also lead to a correction in gold prices.
Competition: Increased competition from both banks and non-banks could lead to lower lending yields
and growth, adversely impacting profitability.
BACKGROUND
Manappuram Finance was incorporated in 1992 and is now the second largest gold loan NBFC in India.
The company is promoted by Mr VP Nandakumar, MD & CEO, whose family has been involved in the
gold loans business since 1949. Manappuram's AUM stood at INR 114b as on March 2016. It has a pan-
India presence, with 3,293 branches across 23 states and 4 union territories, through which the company
serves 1.93m customers. Promoters, Mr VP Nandakumar and family hold ~33.7% in the company. Various
DIIs and FIIs hold 40%. The senior management comprises professionals with significant experience in
the financial services business.

2 June 2016 2
 Manappuram Finance

IVRCL: Financials and Valuation

Financials and valuation

Income Statement (Consolidated) (INR Cr)

Y/E March FY14 FY15 FY16 FY17E FY18E
Interest Income 2,076 1,968 2,349 2,822 3,417
Interest Expenses 1,027 877 947 1,125 1,412
Net Interest Income 1,049 1,091 1,402 1,697 2,005
Change (%) -1% 4% 28% 21% 18%
Non Interest Income 36 25 25 27 29
Net Income 1,085 1,116 1,426 1,724 2,035
Change (%) 1% 3% 28% 21% 18%
Operating Expenses 695 674 836 970 1,110
Pre - Provision Profits 390 442 591 754 925
Change (%) 0% 13% 34% 28% 23%
Provisions 47 28 42 60 61
PBT 343 414 548 694 864
Tax 117 142 193 236 294
Profits to grow at a CAGR of
Tax Rate (%) 34% 34% 35% 34% 34%
26% over FY16-18E on the
back of strong loan growth, PAT before Min. Int. 226 271 355 458 570
low OPEX and stable credit Less: Min. Int. - 0 2 7 12
costs PAT after Min. Int. 226 271 353 451 558
Change (%) 8% 20% 30% 28% 24%

Balance Sheet (Consolidated) (INR Cr)

Y/E MARCH FY14 FY15 FY16 FY17E FY18E
Equity Share Capital 168 168 168 168 168
Reserves & Surplus 2,324 2,465 2,590 2,815 3,136
Net Worth 2,492 2,633 2,758 2,983 3,304
Min. Int. - 15 21 28 40
Pref. Sh. - 5 5 5 5
Borrowings 7,795 8,632 9,638 12,393 15,298
Other Liabilities 551 331 417 459 536
Total Liabilities 10,838 11,616 12,839 15,867 19,183

Advances to grow at 24% in Cash & Bank balances 863 823 463 236 280
FY17E supplemented by Investments 796 217 49 49 49
higher gold prices; and at Loans 8,242 9,622 11,519 14,439 17,572
over 20% post FY17E given Net Fixed Assets 207 207 230 190 147
the rising mix of fast growing
Other Current Assets 702 716 534 910 1,092
non-gold businesses
Deff Tax Asset 29 31 43 43 43
Total Assets 10,838 11,616 12,839 15,867 19,183

Asset Quality (Consolidated) (%)

Asset quality to remain GNPA 99.6 108.4 100.8 129.5 157.4
stable NNPA 82.3 90.0 70.6 82.4 89.2
GNPA Ratio 1.2% 1.1% 1.0% 1.1% 1.2%
NNPA Ratio 1.0% 0.9% 0.7% 0.7% 0.7%
PCR 17% 17% 30% 36% 42%
E: MOSL Estimates

2 June 2016 3
 Manappuram Finance

IVRCL: Financials and Valuation

Financials and valuation

Ratios (Consolidated)
Y/E March FY14 FY15 FY16 FY17E FY18E
Expect yields to decline due Avg. Yield on loans 22.9% 22.2% 22.4% 21.9% 21.5%
to a gradual rise in Avg. Cost of Borrowings 12.9% 12.3% 11.0% 10.8% 10.8%
competition Spread 10.0% 9.9% 11.4% 11.1% 10.7%
Net Interest Margin 11.3% 12.1% 13.2% 13.0% 12.5%

Profitability Ratios (%) (Consolidated)

RoE 9.2% 10.6% 12.8% 15.3% 17.3%
High capital adequacy to fuel RoA 1.9% 2.4% 3.0% 3.3% 3.4%
advances growth without Cost to Income 64.1% 60.4% 58.6% 56.3% 54.5%
dilution
CAR 27.7% 25.6% 24.0% 20.9% 19.1%

Valuation (Consolidated)
Adj. Book Value Per Share (Rs) 28.7 30.3 32.0 34.5 38.2
Change (%) 2% 6% 6% 8% 11%
Price-BV (x) - - 1.6 1.5 1.3
Stock trades at 1.3x FY18E
EPS (Rs) 2.7 3.2 4.2 5.4 6.6
P/ABV with advances/profit
growth of 24%/26% over Change (%) 8% 20% 30% 28% 24%
FY16-18E and ROE Price-Earnings (x) - - 12.6 9.9 8.0
improving from 12.8% in Dividend Per Share (Rs) 1.8 1.8 1.8 1.8 1.8
FY16 to 17.3% in FY18E Dividend Yield (%) - - 3.4% 3.4% 3.4%
E: MOSL Estimates

2 June 2016 4
 Manappuram Finance

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Disclosure of Interest Statement Manappuram Finance

1.Analyst ownership of the stocks mentioned above No
2.Served as an officer, director or employee No
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